Sustainability managers could be forgiven for reacting with dismay two years ago when consultations began for the Task Force for Nature-related Financial Disclosures (TNFD): a proposal for another voluntary disclosure framework, similar to the well-established TCFD for climate-related financial disclosures, but spanning the many more dimensions of nature-related risk. But substituting the ‘C’ with ‘N’ has quickly established TNFD as a valuable tool for sustainability-strategy development.
The launch of the TNFD version 1.0 on Tuesday 19th September establishes a disclosure framework for companies to report their impact on natural resources and their strategies for managing that risk. It helps companies identify their nature-related impacts, dependencies, risks and opportunities.
Risilience has been working with our corporate clients for the past couple of years on preparing for TNFD and has been a knowledge partner of the TNFD from an early stage. Our platform enables companies to Locate, Evaluate, Assess and Prepare (the LEAP framework) their nature risk by mapping their company’s digital twin onto detailed assessments of nature-depletion locations. Turning these into financial exposures enables materiality to be identified. In fact, not just materiality but double materiality: the impact of the company on nature, and the impact of nature changes on the company.
TNFD reporting is voluntary. There is advantage in becoming an early-stage reporter, as there was with TCFD reporting for climate, with early adopters receiving credit from investors and consumers. But take-up of TNFD is still likely to take several years. The TCFD was established in 2015. By 2018, 22 per cent of large companies ‘supported the aims’ of TCFD but it wasn’t until 2021 that the majority of companies filed a TCFD report. Today over 90 per cent of large companies file a TCFD report and it has become mandatory in the EU, UK and six other countries. It is likely that TNFD uptake will be faster than TCFD, now that companies can see the advantages – or the inevitability, but there are no signs yet that TNFD itself will become mandatory. Nature-based regulation generally is increasing in many jurisdictions around the world and TNFD is a useful tripwire to assess where more aggressive regulation might impact a business.
TNFD is applicable worldwide but it may well be that the EU Corporate Sustainability Reporting Directive (CSRD) comes to dominate corporate thinking around nature regulation, as it draws on the TNFD framework for its approach to environmental reporting. Despite being a European regulation, it affects global companies with operations in Europe, and companies in Europe with supply chains that touch nature anywhere in the world, effectively obliging companies to take a global approach to nature-risk assessment.
On the face of it, the potential complexity of nature risk is daunting. The language of ecology deals in biomes and ecosystem services, planetary boundaries, and biosphere integrity. Putting this in business terms means that companies must understand where their pollution, waste, raw-material extraction, end-of-life products and water usage might be depleting natural resources that can’t be replenished. There is a structured checklist for assessing this but it can be an organisational challenge to complete a full audit of a company’s nature-risk exposure. Most companies are triaging their approach to tackle the largest concerns first, and progressively improve their assessments and data over time.
Nature risk for a business is likely to follow a similar progression to the way companies have had to address their climate-change risk, considering both physical and transition risks to their balance sheets and strategies. Physical risk is the threat that a business could be disrupted by failures of supply from the natural resources that it uses – for example being unable to grow crops in a key region because the soil nitrogen and pollination systems become too depleted. Transition risk is the business challenge that could arise with potential policy changes that increase regulation to protect natural resources.
The transition risk of increased future regulation in many countries around the world is likely to be the main management challenge for businesses dealing with nature risk. Fiercer regulation will probably add administrative burden and, ultimately, cost to a business where it interacts with natural resources, as a lever to bring about change to preserve those natural resources. In a similar way that carbon pricing is now well understood as a mechanism for incentivising a company to reduce its greenhouse gas emissions, so nature-based pricing mechanisms will increasingly be used to change the rules of how a company interacts with its environment.
We are likely to see increased cost for using water where it is scarce, higher penalties for pollution, regulatory taxation for deforestation and land-use change, surcharges for package littering and end-of-life product disposal, and many other areas that will impact businesses in unexpected ways. Businesses that consider various scenarios for future regulatory and pricing regimes, and the pace at which they might be implemented across their various markets, are best placed to develop strategies for adapting to this new nature-positive economy.
Increased, nature-based regulation worldwide is being driven by annual meetings of governments at a UN Conference of Parties (COP) for biodiversity, in a process that is mirroring the COP Climate commitments. The UN Biodiversity Convention, COP15, at Montreal in December resulted in 188 countries signing up to an ambitious Global Biodiversity Framework with a target of achieving integrity, connectivity and resilience of all ecosystems by 2050, and extending protection from 17 per cent to 30 per cent of the world’s land and from ten per cent to 30 per cent of its water systems, together with a raft of measures to improve reporting and transparency, incentives, and sustainability of threatened environmental areas. COP16, which will be held in 2024, will review progress of national goals under this framework and encourage participating parties to go further.
The COP framework provides a clear indication of what companies can expect in terms of natural-resource regulation in different countries of the world by 2030 and 2050, similar to the timescales for decarbonisation and net-zero commitments for carbon. There is a strong synergy between business strategies to reduce carbon emissions and sustainability programmes for natural resources. Smart businesses are combining the two. Forecasts of future nature costs and regulatory environments show how companies can shape their sustainability strategies and demonstrate their benefits to the financial bottom line.
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